Ethical investment should not and need not involve trading profits for morals and communication around such approaches is no longer a "nice-to-have" feature but a central one for successful firms. This article examines the issues from a communications point of view.
The term "socially responsible investment" sometimes can be taken to mean where investors want to achieve particular non-financial outcomes as well as monetary gains by screening businesses that, for example, are deemed harmful to the environment, or which harm employees, and so forth. The term can mean stripping out "bad" investments from a portfolio, possibly narrowing the available universe of investable securities; it can also in some ways mean searching for "good" investment ideas. There are a variety of terms in play: recent months have seen an upsurge of interest in "impact investing" - putting money to work to achieve non-financial and financial returns in a way that does not, its practitioners say, involve any dilution of monetary returns. The area remains relatively young; there is a need, arguably, for more data on performance and performance attribution. Such forms of investment need to be measured through the peaks of troughs of the economic cycle - how will they stand up to a major recession and market correction?
In such a situation, a firm that works in areas of business PR, strategy and communications needs to realise that investors - not to mention skeptical journalists - require clear information about these areas. At Instinctif Partners, an associate at its capital markets group, Ambrose Fullalove, talks about how the narratives of socially responsible investment and related forms of money management need to be crafted. The editors of this news service are happy to share such insights; they don't necessarily agree with all guest contributors' opinions and invite responses. Email email@example.com
Investments that yield strong returns, as well as being socially responsible - what’s not to like? The answer, according to a growing number of institutional investors, is nothing. Sustainable and responsible investment (SRI), which aims to deliver positive social or environmental impacts alongside financial return, is increasingly delivering on both accounts.
As a result, sustainable and responsible investment is quickly growing in popularity with more capital being deployed under this umbrella. Specifically, the amount of assets under management following SRI strategies has almost doubled worldwide over the past five years and with relative parity on returns, the social outcomes of such investments offer a considerable differentiator.
Given the evidence, the ever-growing appeal of these investments is understandable. A 2017 study of responsible investment from Nuveen TIAA Investments found "no statistical difference in returns compared to broad market benchmarks" and that "incorporating environmental, social and governance (ESG) criteria in security selection did not entail additional risk".
Whether it’s due to such returns or a maturing of SRI strategies, investors are waking up to the opportunities for both market-rate returns and a positive impact on society and the environment.
As environmental, social and governance (ESG) criteria are, and will continue to be, a growing priority for institutional and retail investors alike, this poses a fantastic opportunity for the image of investment management. However, it also comes with a clear communication challenge.
Communication and transparency
More than ever, global investment managers must focus on telling the story of how they manage socially responsible investment. Not only must they communicate the credentials of specific funds or products they offer, but increasingly they must place it at the heart of their corporate messaging and investor communications too.
For example, in its 2017 Institutional Investor Survey State Street Global Advisors found that among adopters of ESG strategies, the key attraction to investment is the quality of communication. This was ahead of a proactive and visible engagement strategy (second) and significantly, a strong track record (third).
Moreover, even compared to 2016, our own research has found conversations including ESG in major UK news and business sources have risen 95 per cent this year, and it is hard to see this momentum falling. Today, it is not an option for an investment manager to not to have a view on ESG or SRI.
Transparency is also increasingly important, particularly in an age where access to information and data is expected – and data providers are wising up to this. For example, MSCI ESG Fund Metrics, provided by MSCI ESG Research LLC, is now available on 10 market data platforms globally, helping to provide greater transparency and information on ESG fund performance.
The 20th anniversary of the Global Reporting Initiative (GRI) marks a milestone in the openness of company data, and as the market continues to become more transparent there will be fewer places to hide for managers who are not seen to be embracing ESG standards.
Responsible investment becoming the norm
In a further sign that responsible investment is becoming increasingly popular across asset classes, TPG’s $2 billion Rise Fund was a significant landmark for private equity and beyond. The fund, which was recently raised to achieve social and environmental impact alongside competitive financial returns, has joined a growing list of vehicles tapping the surging demand for similar strategies.
Others will undoubtedly be assessing how to appeal to those with a growing fondness of ESG as it moves towards becoming the norm.
Furthermore, recent research by Private Equity International showed that even across alternatives, limited partners (LPs) – including the world’s largest pension, endowment and sovereign wealth funds – are placing increasing emphasis on ESG. In fact, the survey found that nearly half of LPs regard ESG as "becoming a more regular consideration" in fund due diligence, with almost a quarter always considering such criteria.
Most importantly, investment managers no longer need to choose between ethics and profits. With a growing pool of institutional investors seeking socially responsible returns, the opportunities for investment managers is significant. Today, ESG is about more than the warm feeling of social responsibility – it has a commercial edge too. Those that communicate effectively about their ESG credentials are likely to develop an edge over their peers too.